Business Essentials

Business Model Types

A business model is supposed to answer who your customer is, what value you can create or add and how you do that at a reasonable cost.

Peter Drucker

Most businesses are started by the idea of a product or service that will fit a gap in the market, not many will have a business model at the front of their minds at this point. 

Once you have a clear understanding of your product or service offer it is important to research and decide on a business model. The business model identifies the kind of structure and revenue stream you will be looking to use.

When researching a business model make sure to consider that:

  • Many of the business models overlap
  • Many businesses have more than one model in operation at any one time
  • The internet has added some new models but adopted prior models too and relabelled them

Below is a list of business models to help you start thinking about which kind could suit your idea.

Types of Business Models - ‘traditional models’

  • Brokerage: Brings buyer and sellers together and make a % margin in the sale (e.g. Stock Brokers, Insurance). Auction houses (e.g. TradeMe).
  • Advertising: Content for free but paid to advertise (e.g. Local free papers, YouTube).
  • Infomediary: Collecting information about products and services and selling the data (e.g. Which).
  • Merchant: Wholesaler of goods or services, either with a list price or through auction sales (e.g. Billingsgate Fish).
  • Manufacturer: Creates a product from raw materials and sells either direct or through distributor (e.g. GE)
  • Affiliate: Makes a % cut of revenue from high volume traffic often with financial incentives - commissions (e.g. Shopify).
  • Community: User loyalty drives revenue of ancillary products and services. Revenue tied to advertising and subscriptions (e.g. GiffGaff telecom).
  • Subscription: Users charged periodic fee to subscribe to products or services. Advantage is to obtain services before general public or at a better rate (e.g. Dollar Shave Club).
  • Pay as you Go (PAYG): ‘On-demand’ model whereby customers ‘pay as you go’ (metered approach) for services. Traditionally used by utilities but now extended to SaaS/PaaS IT businesses (e.g. Softools).

‘Internet  Economy models’

  • Manufacturer: Creates a product from raw materials and sells either direct or through distributors. The internet changes mainly the supply chain and production side of things.
  • Distributor: Buys and resells through its own platform charging both seller and buyer - usually in a B2B context (e.g. Westcoast).
  • Aggregator: Brings services, information and products together under its own brand. (e.g. AirBnB, Uber). Can apply a layer of intelligence and analysis. 
  • E-tailer: Sell direct to the public but only via the internet (e.g. Amazon).
  • Bricks & clicks: Online ordering and off line pick up on site or via third party location (e.g. BooHoo).
  • Freemium: Basic services free but fee charged for premium add-ons (e.g. Dropbox, Spotify, LinkedIn).
  • Subscription: Sign up customers to recurring revenue over long term, if customer acquisition costs are high (e.g. Netflix). 
  • SaaS - Software as a Service / PaaS - Platform as a Service (e.g. Microsoft teams)

Business Value 

Considering the types of business models above, think further about where the value in your business lies.

You may wish to think about what a potential customer will buy from you, where your revenue streams will come from (and this may not just be from direct sales).  

Are you using just one of the models above, or a combination of multiple different ones to reach a variety of customers?

Which ever model(s) you choose, remember to research them thoroughly and consider if there is an industry 'standard' for your type of business.  If there is, you may choose to stick with that business model, or may see an opportunity to innovate and break free from a set approach.  

Next up, time to think about your business strategy and deep dive into your business plan.

Business Planning Guide

Business Planning Guide

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